Stocks fall as trading starts for year of great expectations

Pedestrians wearing protective masks pass in front of the New York Stock Exchange in the US on Monday, January 4. Bloomberg

US stocks pulled back from their recent record highs Monday, as big swings return to Wall Street at the onset of a year where the dominant expectation is for a powerful economic rebound to sweep the world.

The S&P 500, which ended 2020 at an all-time high, slid 1.5 per cent after earlier dropping as much as 2.5 per cent. It was the benchmark index’s biggest decline since late October.

Additionally, the S&P 500 suffered its worst decline to start a year since 2016.

Technology companies accounted for a big share of the sell-off, along with industrial, communication services, healthcare and other stocks. Only the S&P 500’s energy sector managed to eke out a gain.

The selling comes as coronavirus cases keep climbing at frightening rates around the world, threatening to bring more lockdown orders that would punish the economy. The worsening numbers also raise the possibility that Wall Street has been overly optimistic about the big economic recovery it sees coming because of the Covid-19 vaccines.

Tuesday’s coming run-off elections to determine which party controls the Senate may also be contributing to the volatility.

“We’ve got a wobbly start to the year here,” said Lindsey Bell, chief investment strategist at Ally Invest. “Investors are looking for a reason to lock in profits. The selling is probably a bit overdone.”

The S&P 500 fell 55.42 points to 3,700.65. The Dow Jones Industrial Average also fell from its record set last week, shedding 382.59 points, or 1.3 per cent, to 30,223.89. At one point, it was down 724 points. The tech-heavy Nasdaq composite lost 189.84 points, or 1.5 per cent, to 12,698.45.

Small company stocks, which have been notching solid gains in recent weeks, also fell. The Russell 2000 index of smaller companies dropped 28.94 points, or 1.5 per cent, to 1,945.91.

Stocks also fell in Japan as officials there mull a state of emergency due to surging virus cases. But optimism was more prevalent in other markets, with European and most Asian indexes closing higher.

Investors have been hoping that vaccines will allow daily life around the world to slowly return to normal, which has helped spark a recent recovery for stocks of travel-related businesses, smaller companies and other industries left behind for much of the pandemic.

Still, rising coronavirus cases, the emergence of a mutant variant of the virus and concerns that the vaccine distribution is not happening fast enough are keeping investors on edge, said Adam Taback, chief investment officer for Wells Fargo Private Bank.

“The (virus), the severity of the impact it’s going to have during the winter is still weighing on people’s minds,” Mr Taback said.

Even though infection rates and numbers of patients in hospital are at alarming levels, many investors have been betting that ultralow interest rates provided by the Federal Reserve and financial support for the economy recently approved by Congress can help tide the economy over until vaccinations become more widespread.

Governments might throw less stimulus at their economies than last year, but policy is “still at a very loose setting,” which supports stock prices and lending, said Kerry Craig of JPMorgan Asset Management in a report.

“Investors should look through the bumpier start to the new economic cycle and focus on the improved earnings outlook,” Mr Craig said.

Of course, many risks remain for the market, even beyond the threat of economic lockdowns coming in the near term because of the raging pandemic. Prices have climbed enough that critics say stocks may be too expensive, particularly if the big rebound in corporate profits that investors expect to occur later this year does not materialise.

Politics is also still a wild card. If Democrats sweep the two run-off races in Georgia, that could lead to higher corporate tax rates, tighter regulations and other changes from Washington that would hinder corporate profits. Democrats already control the House, and President-elect Joe Biden is a Democrat.

“The concern around that is regulatory risk and tax policy risk are back on the table,” Bell said. “That has investors feeling a little bit anxious.”

But even in a Democratic sweep, markets see some causes for optimism, including the potential for more stimulus for the economy. Democrats have been lobbying for $2,000 payments to go to most individuals, for example.

Almost nine out of 10 stocks in the S&P 500 fell Monday. On the losing end of the market were several Big Tech stocks. Because they are so large in size, the movements of Big Tech stocks have much more sway over the S&P 500 than other companies.

Airlines, cruise operators, hotel chains and stocks of other companies hit particularly hard by the pandemic also had some of the market’s sharpest losses.

In the bond market, the yield on the 10-year Treasury rose to 0.91 per cent from 0.89 per cent late Thursday. Earlier in the morning, it had climbed as high as 0.96 per cent in a signal of rising expectations of economic growth and inflation.

Markets were closed Friday for New Year’s Day.